The Credit and Debit Card Market Environment
Barclaycard is a market-leading provider of credit and debit cards within the UK. With 8.4 million customers, we have built a considerably reputation of growth and innovativeness over the years. However recent external and internal issues in the credit card market have had significant effects on the opportunities and threats present within Barclaycard.
Being the Marketing Manager at Barclaycard, I have conducted a situational analysis of the macro economy within the UK, the plastic card industry and within Barclaycard as a company, in order to ascertain the major issues affecting the company, and highlight future strategic options that may be relevant for growth.
The following report therefore highlights a situation analysis of the UK macro environment, industrial analysis of the credit and debit card industry, and a SWOT analysis of Barclaycard. The major issues affecting the organization, as a result of these analyses would be discussed subsequently, followed by four major strategic options that could drive the organization’s growth. An update to the case study has also been provided in the last chapter, which highlights relevant factors that have occurred since the case study was written.
2. SITUATION ANALYSIS
The following situation analysis contains key factors that have been identified using the case study, as being relevant and having a direct or indirect effect on the macro economy, payment processing industry and Barclaycard as a company.
a.MACRO ENVIRONMENT USING PEST
The credit crisis that emanated from the US in 2007, hugely affected financial institutions the world over, and led the UK government to nationalize Northern Rock, one of the nation’s biggest mortgage lenders, and part nationalise RBS and Lloyds TSB, two leading UK banking groups.
The financial crisis resulted in restrictions on capital movement, and tightened lending criteria, amongst financial institutions, effectively affecting economic growth. Though the government may have hastened the availability of credit by bailing out some major banks, it is unlikely that the UK economy would recover soon.
The UK household debt increased to ?1.4 billion in April 2008, though it is mostly as a result of mortgages and secured lending, it does reflect the relevance of debt in the everyday lives of the average UK resident. Being in debt has become an inevitable part of living, especially amongst younger individuals who have embraced the ideology of buying items on credit.
The lacklustre potential for future recovery or growth within the UK economy, has impacted on most indebted citizens as 25% of adults have plans to repay back their debt in coming months. These decisions to repay debt and cut back on spending are also as a result of the increasing cost of living within the UK, and cost of oil.
43% of consumers surveyed regarding their concerning social issues, cited money as the most concerning issue. This reflects the impact that the current state of the economy has on each individual, and their growing attitude towards personal finance and cash management.
b. MICRO ENVIRONMENT ANALYSIS
i. INDUSTRY TREND
The amount of credit cards in issue has also been in steady decline, compared to the growth in debit cards. This illustrates that consumers are increasingly turning to their savings to make payments, as opposed to using credit cards for purchases, hence the growth in debit cards.
The credit card market is also becoming increasingly settled with a reduction in switching intentions amongst customers, thereby reflecting negatively on the current strategy amongst lenders to attract customers by offering attractive balance transfer incentives.
The average purchase made through debit and credit cards is currently high, thereby establishing an opportunity to facilitate spending on lower value items. This could increase customer reliance on plastic cards, and subsequently help increase the total amount spent on each card.
The economy may take longer than expected to recover, which adversely affects consumer income. Though this may potentially increase application for credit, it also increases the risk of customers who are likely to default on loans.
The average loss on credit cards issued has grown recently, with banks being hit with larger impairment charges on consumer credit cards and other related personal loans.
The economical situation has resulted in mistrust between lenders, and a subsequent unwillingness to lend between each other. This is resulted in lesser amount of available credit for these banks to loan to customers.
Recent legislations by the government have outlawed the sales of payment protection insurance, thereby resulting in fines for several credit card providers, and refunds to all customers that have paid premiums for the insurance.
The FSA administered Insurance Conduct of Business (ICOB) has also released new regulations regarding the process in which financial service companies disclose information during sales of insurance products, and has also increased the length of cooling off period, thereby impacting on credit card companies’ ability to sell insurance products to consumers.
There is an increasing divide in the market amongst credit card users. A huge amount of customers are increasingly shifting their focus from obtaining credit to paying off credit card debts, whilst another portion of consumers are using credit cards to pay off house rents and mortgages, amidst rising unemployment. This could therefore result in a situation whereby credit worthy individuals are paying off their credit card debts, while those that do not have a source of income, run the risk of becoming bad debts due to lack of available income to service the credit card bills.
Consumer trust in financial service providers has been seriously affected due to the events surrounding the credit crisis. Consumers are increasingly weary of financial service products due to the effect of the credit crisis on the leading banks within UK.
Due to the increasing competition amongst lenders, the bargaining power has shifted towards the consumers. They are increasingly consulting price comparison websites to compare credit card packages for the best deal.
Consumers are also drawn to transfer their balances to new credit cards, wherein they would not have to pay interest on the amount they owe for longer periods of time.
Debit card users have become active in switching, and this has adversely affected the major players within the cards industry, as the five major banks have jointly lost 5ppt of their market share over the past 12 months.
The competitive rivalry amongst industry participants is high. Presently there are five players controlling the credit card market and these are Barclays/Barclaycard (22%), Lloyds TSB (17%), HSBC (12%), Natwest (12%), and Halifax (11%). Lloyds TSB however has the largest market share in the debit card market, followed by NatWest/RBS, Barclays and HSBC.
However the two largest debit card companies (Lloyds TSB and RBS/NatWest) are partly owned by the UK government, thereby posing a threat to their competitive sustainability if the government continues to exert substantial influence over their operations. Banks such as Barclays and HSBC are therefore at a competitive advantage as they can leverage their reputation and financial independence.
The economic condition has resulted in various lenders tightening criteria on lending conditions, therefore higher risk individuals are unable to obtain credit cards, while those with good credit rating are being fought for by several lenders, thereby resulting in a wave of competitive and low priced offers.
The fierce competition amongst providers has led to various competitive strategies based on very attractive offers and loyalty schemes for customers. Offers such as 0% on purchases and balance transfers are being promoted strongly, while other providers such as Barclays are offering lifetime low interest rates on consumer credit. Providers such as Lloyds are promoting Air miles loyalty scheme, while Capital One and Virgin Money offer long term zero interest rates so as to attract new customers. Customers that are feeling the effect of the credit crisis are likely to shop for such deals and switch providers.
The major suppliers are Visa and MasterCard, however, they only provide the relevant infrastructure through which payments are processed, and charge a fee to banks for utilising their services. Their supplier power is therefore considerable as they are the two major credit card companies.
c. INTERNAL SWOT ANALYSIS
Barclaycard is currently the biggest provider of credit cards within the UK, with a market share of 22%, whilst its debit card share is third only to Lloyds TSB and NatWest. Barclaycard claims to have 8.4 million credit card customers, and posted impressive profits for 2009.
The company has invested significantly in product innovation such as its contactless technology, which allows its cardholders to make purchases lower than ?10; by tapping them card against a contactless reader. It has also launched the OnePulse card that incorporates the Oyster card for transportation purposes.
Barclays’ inability to gain substantial market share in the debit card market, may result in a loss of possible income if the debit card growth trend continues to persist.
Barclays has been severely affected by the credit crisis and consumer default, as it had to write off ?5.4 billion off its asset, as consumers failed to make payments for credit card and other personal debts. Rising unemployment and the current economic situation has led many consumers to declare bankruptcy or profess their inability to make payments.
The current state of the economy also serves as a considerable threat to Barclaycard as it is increasingly difficult to gain new credit worthy customers that would be profitable and repay back loans.
The competition amongst existing players is only slated to increase as the number of credit cards in circulation decreases, while that of debit cards increase. The outstanding balances may fall, while the profit made off charges and interest could also reduce significantly.
The drop in advertisement within the leading providers of credit card could result in a situation whereby other smaller brands take advantage of their lack of media presence, and gain considerable market share in the process.
There are opportunities in contactless technology, which is new and revolutionary, and may indulge more people into switching to an innovative provider or paying for lower priced goods with their credit and debit cards.
Barclaycard’s partnership with Oyster and O2, could result in newer products that have the possibility of ensuring that their market share continues to increase on the back of innovativeness.
The economic condition presents the right opportunity for lenders that have been less affected, such as Barclays, to gain market share by leveraging its reputation. Barclays is one of the two major banks that did not seek government protection during the credit crisis, and that has helped improve its reputation in the financial markets and also amongst the population. Consumers would therefore trust the brand better, as opposed to those that have been previously accused of mismanagement and risky practices
3. MAJOR ISSUES
Based on the situational analysis conducted above, these are the four major issues currently affecting Barclaycard:
There is a general decline in the use of credit card for transactions. The number of credit cards in issue has declined in recent years, while that for debit cards has increased. This represents a significant issue because, as the outstanding balances in the lender’s portfolio reduces, so does the fee chargeable for interest rates, wherein their profit is derived from.
Consumers have cut back on spending amidst rising unemployment and low confidence about the UK economy. Consumers cutting back on spending, due to the rising unemployment and uncertainty about the economy, reflect negatively on the credit card industry. Consumers would be less willing to use their credit cards for purchases or incur more debt, and this affects the interest attributable to card companies and the number of new cards issued.
The current economic situation has led lenders to tighten lending conditions, in order to avoid increasing impairment charges. Impairment charges for Barclays were ?5.4 billion in 2008, thereby illustrating the increasing threat of the economy on Barclaycard’s business. This increases the emphasis on managing bad debts, and obtaining credit worthy customers that are able to service their credit card debts.
Competition amongst existing players in the credit and debit card market is on the rise. Smaller companies are gaining market share, leading companies are offering lucrative deals, and consumers are looking for more attractive offers. In order to protect it’s market leading position in the credit card market, and gain substantial share of debit cards, Barclaycard needs to device strategies that attracts and retains consumers.
Based on the situation analysis already conducted and the four major issues affecting Barclaycard, the following are strategic options that have been developed based on Porter’s (1980) Generic Strategies and the Ansoff’s (1984) Matrix.
a. OPTION 1
Introduction of new and innovative debit and credit card products into the market, that follow suite on the success of contactless technology, and encourage users to adopt the card for everyday multiple processes.
This could increase Barclays’ market share by increasing the number of consumers who switch to its innovative service, and improve customer usage of plastic cards for smaller purchases.
This strategy is based on Ansoff’s Matrix: New Products + Existing market = Product Development
The amount of credit cards in issue is declining, so this could help improve applications for credit or debit cards within a particular brand.
Consumers do not really use their credit cards for lower value purchases.
Contactless technology and multiple applications in credit cards (Oyster and Mobile Phone recharge) could change the industry and attract more consumers to a particular brand.
The Product would be a new range of innovative cards capable of handling multiple applications such as the already existing contactless technology, and Oyster card. It could also be integrated into other useful cards like School ID and Gym membership cards. APR Pricing would be slightly higher than a normal card due to the innovativeness of the product. Promotion for the card could be targeted at young professionals and students who would like to use their cards as a one-stop shop for transport, credit card, gym membership and even school ID. The product could be marketed at Universities, through affiliates, and other relevant channels.
b. OPTION 2
Barclaycard could strengthen its position in the debit card market by offering attractive packages that lure customers into opening current accounts within its bank.
Since debit card issuance is based solely on the number of current accounts within a bank, Barclaycard could utilise this in growing its market share from third position into first or second and beat rivals Lloyds TSB/HBOS and RBS/NatWest.
This strategy is based on the Ansoff Matrix: Existing Markets + Existing Products = Market Penetration.
The current market for credit cards is reducing, with a subsequent increase in debit card issuance, it seems consumers are reducing their reliance on credit and focusing on using their savings and debit cards for purchases.
Consumer confidence has fallen in recent years; therefore Barclays could leverage its untarnished reputation in gaining market share against competitors.
Its innovative credit cards could be utilised as an effective attractant.
The Product here would be attractive current accounts, marketed with lucrative benefits and at reduced prices, in a way to encourage customers to switch from their current providers and set up with Barclays. Attractive introductory offers could be offered on current accounts, while impressive benefits such as insurance and assistance packages could also be included. An important selling point would be the issuance of innovative debit cards, and a reputable organization with excellent service. Promotion could be handled through all available media channels, while the target audience would be anyone with a current account, or who has the intentions of opening one.
c. OPTION 3
Barclaycard could reposition itself within the industry as a provider of unique differentiated debit and credit cards. These cards would contain its full range of innovative technologies, with a slightly higher APR, premium loyalty schemes and would be targeted at ABC1 credit worthy individuals.
This strategic option is based on Porters generic strategies: Broad based industry wide scope + Product uniqueness = Differentiation Strategy
The current economic situation increases the risk of bad debt amongst the mass population, therefore targeting a premium service at credit worthy individuals, would go a long way in securing Barclaycard against bad debt, and help in attracting sought after customers.
Individuals who already have credit cards, would be attracted to switch towards Barclaycard due to the range of premium services provided and benefits associated with using the card, thereby eliminating the high competitiveness amongst existing players all fighting to introduce the latest 0% offer to attract consumers.
The Product would be marketed as a premium service, encompassing latest technologies, premium packages, and attractive features such as Air miles, Supermarket and store discount, and a range of VIP benefits. Promotion would be aimed at ABC1 credit worthy individuals through appropriate channels, and the products would be communicated as a differentiated product, based for the affluent. APR Pricing would be slightly higher than normal cards due to the benefits, while the products could be sold through all relevant channels across the bank’s network.
d. OPTION 4
The last option would be to adopt a cost leadership strategy, aimed at attracting as many customers as possible either through new customer acquisition or balance transfers.
This model is based on Porters generic strategies: Broad Industry wide focus + Low cost strategy = Cost leadership strategy.
The buying power has increased and consumers are increasingly looking to online channels to compare and find the cheapest deals. If Barclays provides cheap deals, it has a fair chance of increasing its customer base.
Attractive packages such as balance transfer and payment offers, coupled with low interest rates, could go a long way in ensuring that a wide amount of other customers switch and start using Barclaycard.
Since there is already a general decline in credit card usage, customer acquisition from competitors by offering lower prices and attractive offers, could go a long way in promoting sustainable competitive advantage in the industry, and securing already existing customers.
The Product would be very cheap credit card deals for credit worthy customers. Pricing would be based on competitive offers against current competitors. Lower APRs would be offered, while balance transfer and payment would be offered at competitive rates to prospective customers. Promotion would be targeted at the general public, while the products would be offered through all available channels.
Though the market condition may highlight several relevant issues that currently pose opportunities and threats to Barclaycard, there is no right or wrong strategic option. I have therefore prepared four strategic options that could be interpreted based on our current strengths and competitive capacity, and utilised with the aim of ensuring organizational growth and improving shareholder wealth.
5.UPDATE ON CARD INDUSTRY
a. MACRO ENVIRONMENT UPDATE
The UK economy emerged from its recession in the 4th quarter leading up to December 2009 as GDP increased slightly by 0.3%, fuelling forecasts that the economy would experience in subsequent months (Office for National Statistics, 2010)
Unemployment rates within the UK fell by 0.3% in January 2010, and the number of people in full time employment within the UK fell by 54,000 (Office for National Statistics, 2010)
The Nationwide survey on UK consumer confidence reportedly hit a two year high in March 2010, as the UK reported a GDP growth of 0.3%. Increasing consumer confidence reflects on the general social attitude of consumers, and their views on the economic environment within UK (BBC News, 2010)
b. MICRO ENVIRONMENT UPDATE
The UK Department for Business Innovation and Skills has launched a public consultation on the card industry, which aims to examine the current allocation of payments, repayment policies, limit increases and debt re-pricing, amongst credit card companies. These policies are likely to be widespread and affect the industry and its customers, and it may lead to policies that change operations within the industry (Datamonitor, 2009).
Identity theft fraud has been increasing consistently with the increase in ecommerce, as plastic cards do not necessarily have to be present for such purchases. Thereby increasing the relative cost of IT security to prevent such occurrences (Mintel, 2009)
Poulter (2010) predicts that credit card providers that had previously sold Payment Protection Insurance would have to issue refunds of up to ?4 billion to consumers that have bought it.
Mintel (2009) reports that the number of credit cards in issue has reduced by 5.4% from its high of 70 million in 2004, to 66.2 million in 2009, while the number of debit cards in issue has increased in 19.8% within that same period.
Mintel also reports that the number of consumers that repay their balances in full each month has increased by 3.9% since 2004, reflecting the general trend in the industry, and consumer’s increasing attitude towards repayment of debt.
Payment methods such as PayPal offer a more convenient and safer method for consumers willing to buy products on particular websites, and could act as a convenient substitute to debit and credit card transactions.
c. BARCLAYCARD UPDATE
Barclaycard income grew by 26% in 2009, while average customer asset also increased by 19% to ?28.1billion, reflecting strong growth across the company (Barclays, 2010).
Profits for Barclaycard decreased by 4% in 2009 as a result of impairment charges, which increased by 64%. These impairment charges are due to customers within the UK that have defaulted on their credit payments or declared bankruptcy (Barclays, 2010).
Wallop (2010) also reports that the government could scrap the current 0% wave of offers on balance transfers and purchases, and could also force lenders to stop previous practices, which entailed charging customers for the cheaper credit first.
Word Count: 3,660
Ansoff, H I (1984) Implanting Strategic Management, Prentice-Hall: NJ, 455pp
Barclays (2010) 2009 Annual Report, www.group.barclays.com/investor-relations, accessed: 20/03/10
BBC News (2010) UK consumer confidence ‘hits two-year high’, www.news.bbc.co.uk, accessed: 25/03/10
Datamonitor (2009) UK crackdown is likely to lead to fees and higher interest rates, MarketWatch: Financial Services – Industry Comment, www.datamonitor.com, accessed: 21/03/10
Mintel (2009) Credit and Debit Cards – UK – July 2009, www.mintel.com, accessed: 20/03/10
Office for National Statistics (2010) Employment: Employment rate falls to 72.2%, www.statistics.gov.uk, accessed: 25/03/10
Porter, M.E. (1980) “Competitive Strategy”, The Free Press, New York
Poulter, S. (2010) Banks may be forced to pay back ?4bn in mis-sold insurance scam, www.dailymail.co.uk, March 09 2010, www.dailymail.co.uk, accessed: 20/03/10
Wallop, H. (2010) Credit card reforms: 0pc credit cards could be scrapped, www.telegraph.co.uk, date accessed: 22/03/10
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